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Ray Dalio’s ‘keep dancing’ advice may raise some bad memories from the last two bubbles

  • The manager of the world's largest hedge fund, Ray Dalio, says he is going to "keep dancing" with the markets even though central banks are reversing their easy money policies.
  • Former Citigroup CEO Chuck Prince told the Financial Times in 2007 "we're still dancing" months before he was forced to resign due to the bank's large loan asset losses.
  • Warren Buffett warned against trying to time the exit of exuberant markets in 2000: "They are dancing in a room in which the clocks have no hands."

Bridgewater Associates founder Ray Dalio on Thursday said central banks will reverse their easy money policies.

However, one specific comment about "dancing" from the hedge fund manager may foreshadow a difficult market environment could be right around the corner.

"For the last nine years, central banks drove interest rates to nil and pumped money into the system creating favorable carries and abundant cash … That era is ending," Dalio wrote in a LinkedIn blog post.

The central bankers will now "try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don't get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves."

Bridgewater is the world's largest hedge fund, managing about $160 billion, according to its website.

Market veterans may have a visceral reaction to Dalio's "keep dancing" statement. It is reminiscent of former Citigroup CEO Chuck Prince's infamous quote in an July 2007 interview with the Financial Times. He told the newspaper the cheap credit-fueled buyout party will "end at some point," but the bank had to keep lending.

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing," he said.

Within months of the interview, Prince resigned in November 2007 due to Citigroup's massive losses from its mortgage holdings. The financial crisis across Wall Street during the following year was sparked by the losses in the same subprime loan assets.

In fact the Oracle of Omaha warned against overstaying "dancing" in an exuberant market during the dotcom bubble time period:

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice.

But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands." - Warren Buffett, Berkshire Hathaway 2000 shareholder letter

Even though Dalio predicts tighter monetary policy ahead, he doesn't see issues for the markets in the immediate future.

"We don't project a big debt bubble bursting any time soon (because of the balance sheet repairs that have taken place)," he wrote.

But if the world's largest hedge fund manager is still "dancing ... closer to the exit" others are probably dancing too just like 2007.

Perhaps investors should get ready to run for the door sooner rather than later.

A Bridgewater spokesperson said the firm had no "additional comments to what is in the post," when asked about Dalio's "dancing" comment and Chuck Prince's quote.

Watch: Investing around Dalio's comments